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DRAFT OF A BILL TO REGULATE THE 
SALE OF SECURITIES AND A DISCUSSION 
OF THE MEASURE 


RARY 
af THE . 
eRIVERSITY OF ALLINO!S 


| 


NTST4 


INVESTMENT BANKERS ASSOCIATION 
OF AMERICA 


Office of the Secretary, 111 West Monroe Street 


CHICAGO, ILL. 


ALLEN G. HOYT, Chairman, Legislative Committee 
49 Wall Street, New York City 


CALDWELL, MASSLICH & REED, General Counsel 
100 Broadway, New York City 


W.H. LYON, Assistant Counsel 
141 Broadway, New York City 


{ 
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‘Resolution Adopted at Baltimore on the Second 
of February, 1913, by the Board of 
Governors of the Investment 
Bankers Association of 
America, 


That people dealing in securities in bad faith should 
be put out of business is now a conspicuous object of 
public desire, and one of the definite purposes of this 
Association. Such dealers are defeated when publicly 
pointed out. To this end it is necessary that there be 
those who are constantly interested and alert. With 
vigilant activity special statutes are unnecessary. This 
Association represents those who have a strong and en- 
during interest in the suppression of illegitimate dealing 
in securities. 

For many months the Association has been studying 
the state of the law throughout the country to ascertain 
whether new legislation of any type, specifically upon 
this subject, would improve the existing means of accom- 
plishing the desired end. This Association believes that 
the present law in some of the states is adequate. Where 
this is true additional legislation is superfluous and there- 
fore unwise. The American tendency is toward over- 
legislation. The need is for more effective action, rather 
than for the provision of further mechanism. 

Some states will certainly enact statutes to regulate 
the sale of securities popularly known as Blue Sky laws. 
It is important in the interest of the investing public, of 
the issuers of industrial and other corporate securities, 
and, of course, in the interest of honest dealers, that the 


4 


statutes accomplish their essential object without placing 
undue burden on, or causing undue delay in the immense 
daily volume of legitimate transactions. The facts about 
the manner in which the Investment business of this coun- 
try is carried on ought to be considered with great care 
by those drafting Blue Sky bills. Because it has this 
information, this Association is in a position to suggest 
a type of Blue Sky law which will cause as little embar- 
rassment to honest dealers, with whom no one desires to 
interfere, as may be, without impairing the effectiveness 
of the measure. By way of illustration, the Legislative 
Committee of this Association has drafted a bill, copies 
of which will be supplied to members, and upon request 
to others. Of course it is not expected that this draft 
will be acceptable in every detail, and in every state where 
Blue Sky legislation is deemed essential, but it is believed 
that the draft, and the Committee’s discussion of it, will 
be helpful to any careful constructive study of the 


subject. 


Discussion of the Draft of a Bill to Regulate 
the Sale of Securities. 


Any measure to regulate the sale of securities should 
be as simple as possible. An investment banker ought to 
be able to find out from reading the statute what he 
should do to comply with the law. 

It should not hamper legitimate business more than 
necessary. Whatever its purpose, it should not interfere 
with the freedom of business intercourse between the 
states. The work of investment banking is so com- 
plex that ill-advised measures could easily entangle it to 
such an extent that it could not be carried on. Even 
this draft imposes a considerable burden on the honest 
dealer. Also many of the “blue sky” bills introduced in 
the legislatures would operate in fact to restrict compe- 
tition in the investment business. Any measure requir- 
ing the payment of a registration fee of appreciable size 
or imposing too burdensome requirements as a prelim- 
inary to doing business, or compelling an examination 
and approval of each security before it may be offered 
for sale, will inevitably tend to narrow the number of 
dealers seeking to do business, and the number of sound 
securities in which the citizens of the enacting state may 
invest. 

If any legislation to regulate the sale of securities 
is enacted, it should, however, furnish a real weapon 
against the unscrupulous vendor of securities. It should 
be enacted especially with a view of protecting the small 
investor who cannot afford to make an investigation on 
his own account, and whose unfamiliarity with financial 
affairs does not give him a sufficient basis for discrimina- 
tion between good and bad faith among those offering 
him securities. 


GENERAL PLAN OF THE BILL. 


It seems the best central idea for carrying out these 
considerations to give some state officer or commission a 
right to issue an order to any dealer not to offer in the 
state securities which seem not to be offered in good 
faith. In order to remove any apprehension of ar- 
bitrariness the draft expressly provides a right of 
appeal to the courts. 

In carrying out this thought, the draft provides for 
the filing of certain definite information as a prerequisite 
of doing business in the state except in specially ex- 
empted securities. It seems desirable to make this ini- 
tial requirement simple to comply with, in order to allow 
a reasonable freedom of dealing in legitimate securities. 
If, for example, a dealer should, as a result of established 
reputation, or of magazine advertising, receive an order 
from a distant state, the dealer could fill the order by 
simultaneously filing the information definitely required 
by Section 1. This information would give notice to the 
state officer of the dealer’s doing business in the state, 
and give the officer an opportunity to investigate if he 
wished. Some bills have been drawn requiring a prior 
registration of dealers and a prior approval of securities 
by the Commissioner. This method proceeds on the as- 
sumption that the Commissioner can automatically pre- 
vent any wrongful sale of securities. Such a result seems 
to be impossible, and if it were attainable, its superiority 
over the restrictive method would hardly be worth the 
expense and machinery necessary for its execution, even 
if we ignore its injury to the freedom of honest business 
between citizens of different states. This bill places 
an effective weapon in the Commissioner’s hands, 
with which he can quickly drive an unscrupulous dealer 
out of business. The mere existence of a weapon 
of this kind should be sufficient to keep such dealers 


7 


out of the state. Under the method now proposed, the 
law can properly subject all dealers to the investigation 
and orders of the Commissioner. 

If a permit should be required as a prerequisite to 
doing business, it would be impossible for an investment 
banker to put through the transaction just indicated. It 
might require a week or more before an applicant, even 
‘of such high reputation that a permit would be a matter 
of course, could get notice that he might go ahead. An 
investor would not do business under such conditions. 

The proposed legislation makes it the definite business 
of some state officer to watch carefully securities offered 
for sale in the state, and to make any dealer under 
suspicion of not acting in good faith furnish full infor- 
mation and otherwise submit to investigation. 

A state making the conditions of business too onerous 
through the imposition of heavy fees and the requirement 
of extensive preliminary disclosures, although the dealer 
may be well known as above suspicion, would militate 
against its own welfare. If it should make its act apply 
to all dealers both in and out of the state, many outside 
dealers, each doing in the state a small business, but in 
the aggregate large, could not afford to comply with the 
act, and the inhabitants of the state would be deprived 
of the benefit of their competition. It would not be worth 
while for any dealer to advertise in periodicals of wide 
inter-state circulation, because, on account of the states 
in which he would be barred from doing business, the 
value of the advertising would be so largely lost. The fee, 
if any, should be very small. The regulation is for the 
benefit of all the citizens and there is no special reason for 
the class being regulated standing the expense of the 
regulation. 

The fake investment proposal bears certain earmarks. 
It does not often give a balance sheet and income account 


8 


or much other definite information. In order to be suc- 
cessful it must ordinarily promise exceptional rewards, 
and in many other ways show reason for suspicion to one 
trained in financial matters. If the bill provides some 
means for calling the offering to the attention of the 
state, and gives the state a right to investigate, and the 
state exercises that right, it can exclude the evildoer 
without crippling the honest investment banker. 


To WHOM THE BILL SHOULD APPLY. 


It seems only fair that the bill should apply to all 
who make a business of dealing in securities. 


BANKS. 


If a bank actually makes a business of dealing in se- 
curities, there seems hardly sufficient reason for exempt- 
ing it from provisions of the bill. Unscrupulous men 
might organize a bank and conduct a fraudulent securi- 
ties business under its cover for as long a time as some 
fraudulent concerns have done business in the past before 
reached under the present laws. 


BROKERS. 


Brokers present one of the difficult problems in draft- 
ing a bill. In the ordinary course they merely act as in- 
termediaries between buyers and sellers in transactions, 
which, if the principals met face to face, would be a> 
matter of personal business. Yet, on account of the possi- 
bility of working fraudulent schemes through brokers, 
it seems undesirable that they should be exempted from 
the provisions of a bill aimed at the prevention of fraud in 
security selling. To include them in the kind of bill pro- 
posed would not unduly hamper their work. 


9 


THOSE WHO MAKE A BUSINESS OF DEALING 
IN SECURITIES. 


It is thought that it will not be impracticable to dis- 
tinguish between the dealer and the buyer and seller of 
securities in the ordinary course of personal investment 
or speculation. It is true that insurance companies, 
banks, and individuals may be actively engaged in the 
buying and selling of securities, but it would seem not too 
difficult to distinguish between those who do this as a 
mater of investment or speculation, and those who are 
regularly engaged in doing it as an occupation. 


EXCEPTING LEGITIMATE SECURITIES. 


The aim should be to narrow the act to newly issued se- 
curities and those of doubtful value, bearing in mind that 
if the penalties are made effective a dealer will not take 
chances in selling securities that are not very clearly ex- 
cepted from the act, without complying with it. 

To leave federal, government and state bonds within 
even the apparent scope of the bill would seem absurd. 
Municipal bonds are also a recognized class of invest- 
ments entirely outside of the purpose of this legislation. 
These have been excepted by the proposed draft. The 
larger our classification of clearly proper investments ex- 
cluded, the more effective the act will prove in its opera- 
tion against doubtful securities. Any particular state 
can readily make further exceptions by such classification 
and definition aS may serve the purpose. If a right 
to call for information is reserved, and a_ penalty 
provided for attempting fraud, it would seem desirable 
to make further exemptions from the act, with a view to 
concentrating its force upon new or uncertain securities. 
The exceptions in Section 8 (b) are merely suggestive, 
and are subject to the right of investigation under Sec- 
tion 3. 


10 


UNDERWRITING. 


The success of underwriting transactions may de- 
pend on secrecy. It is believed that the bill as drawn 
exempting from the provisions of Section 3 securities 
offered only to dealers or banks protects these transac- 
tions, so far as they can be protected, without leaving 
the door open to fraud under the guise of syndicate 
operations. 


Modifications or changes of these provisions, may be 
made to meet the special situation in any particular state. 


II 


A’ BILL TO REGULATE THE SALE oF Stocks, BONDS 
AND OTHER SECURITIES. 


SECTION 1. No dealer in stocks, bonds, debentures, 
certificates of participation, or other securities, shall in 
this state, sell, offer for sale, invite offers for, or inquiries 
about such securities by personal solicitation letters or 
circulars, except to other dealers or banks, or by adver- 
tising in any newspaper, magazine or other periodical 
published in this state, until such dealer has filed with 
the Commissioner of Banking: 


(a) A statement under oath showing the name and 
principal place of business of such dealer, and the names, 
residences and business addresses of all persons interested 
as principals, officers, directors or trustees, including the 
name, residence and business address of an agent residing 
in this state, if any. 


(b) Two certificates each signed by different persons 
who shall be officers of different state or savings banks or 
trust companies within this state, or of national banks, 
stating that in their opinion the dealer is of good busi- 
ness repute and financial standing. 


(c) If such dealer is non-resident, a designation dulv 
signed which by its terms shall be irrevocable so long as 
the dealer shall in this state do any of the acts named in 
this section, designating a resident agent, or the Commis- 
sioner, attorney for the dealer for the service of any legal 
process. 


SECTION 2. By an order directed to any such dealer the 
Commissioner may require such dealer, whenever he shall 
offer any security or securities in this state, except to 
other dealers and banks, to file with him a statement 


12 


showing the security or securities so offered, and the Com- 
missioner may by such order require such dealer to mail 
to him, as soon as any copies are so mailed or shown to 
any prospective purchaser in this state, a copy of all 
printed or otherwise reduplicated circulars of any secur- 
ity or securities the dealer shall offer for sale in this 
state, including a copy of all advertisements thereof in- 
serted in any newspaper, magazine or other periodical 
published in this state. The Commissioner may limit 
such an order to securities of any particular class or 
character on which he may deem such information neces- 
sary. 


SECTION 3. The Commissioner may at any time order 


a dealer to file with him evidence, including a statement 
under oath of assets and earnings or other information 
in relation to any security the dealer is offering for sale, 
or inviting offers for, except to other dealers or banks, 
or advertising in newspapers, magazines or other periodi- 
cals published in this state, sufficient to show that the 
offering or invitation has been and is being made hon- 
estly and in good faith, and with disclosure of pertinent 
facts sufficient to enable intending purchasers to form a 
judgment of the security. Unless such evidence is filed 
and is sufficient, as stated, the Commissioner may order 
the dealer not to offer the security for sale or otherwise 
advertise it in such publications or circularize it in this 
state. 


Section 4. On ordering a dealer not to sell, offer for 
sale, circularize, or advertise in such publications in 
this state, any security, the Commissioner must send 
notice to the dealer by registered mail addressed to the 
dealer’s principal place of business, stated as required 
under Section 1, or to such address as the dealer may 
designate for that purpose, stating the reasons therefor. 


2 


13 


On receiving such an order from the Commissioner, 
ive cdealer may apply to aljudge of theses. sa... <os< 
Court for an order addressed to the Commissioner of 
Banking to show cause why the Commissioner’s order 
should not be revoked, and upon such application the 
decision or determination of the Commissioner as to any 
matters or things involved in such order, may be reviewed 
by such judge, and he may suspend the Commissioner’s 
order pending the determination of the application, and 
make such provision as justice may require for the sum- 
mary hearing and determination thereof. 


SECTION 5. Any dealer or agent of a dealer wilfully 
violating the provisions of this act upon conviction 
thereof shall be punished by a fine of not more than 
Spoeae ......and if such violation is with intent to de- 


SECTION 6. Every sale or contract of sale in viola- 
tion of Section 1, or of any order issued under Section 3 
of this act shall be void, and the dealer making such 
contract or sale must on request and tender back of any 
securities received, return the purchase price or any part 
thereof paid. 


lord 


SECTION 7. A corporation or unincorporated associa- 
tion offering its own securities for sale by circular, adver- 
tising, or through agents, except to its own shareholders 
or members, or to dealers, or banks, or by such means in- 
viting offers for or inquiries about its securities, shall be 
considered a dealer under the terms of this act. 


SECTION 8. The provisions of this act shall not apply 
to: 
(a) Bonds or other evidences of indebtedness of the 
United States or any foreign government. 


14 


Bonds or other evidences of indebtedness of any State or 
territory of the United States or any foreign govern- 
ment. 


Bonds or other evidences of indebtedness of any County, 
City, Township, Village, District or other political 
or taxing subdivision of any State or territory of the 
United States or any foreign government. 


Commercial paper or evidences of indebtedness running 
not more than nine months. 


Bonds, stocks or other securities of quasi-public corpora- 
tions, the issue of whose securities is regulated by a 
Public Service Commission or Board of any State 
or territory of the United States or any foreign 
government. 


*(b) The following securities unless, and to the ex- 
tent that, the Commissioner includes them in any order 
under Sections 2 or 3: Securities, including stocks, issued 
by any railroad, steamboat, gas, electric light, or other 
public service corporation, actually in operation over 
three years or having assets, exclusive of franchises, pat- 
ents and good will, exceeding Two hundred thousand dol- 
lars in value, or securities, including stocks issued by any 
other corporation or association having net assets exclu- 
sive of franchises, patents and good will exceeding Three 
hundred thousand dollars in value. 


SECTION 9. If a dealer shall sell, offer for sale, invite 
offers for or inquiries about any securities including those 
mentioned in Section 8 with intent to defraud he shall, 
however, be deemed guilty of violating this act and sub- 
ject to the penalties hereof. 


* The exceptions in Section 8b are merely suggestive. They 
may be modified to meet local requirements and conditions. 


[9277M] _ 


y 


F ILLIN 


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